Stephanie L.

Pajarillon
43623
Project_SBA_Prelims

Problem 1
Madara Corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of P 20,000.
If the lanterns are reworked for P 5,000, they could be sold for P 9,000. If the lanterns are scrapped, they could be sold
for P 1,000.
1. What alternative is more desirable and what are the total relevant costs of the alternative?

Problem 2
Code Production, Inc. owns and operates a chain of movie theaters. The theaters in the chain vary from low volume,
small town to high volume, big city/downtown theaters. Management is considering installing machines that will make popcorn
on the premises. This proposed feature would be properly advertised and is intended to increase patronage at the company’s
theaters. These machines are available in two different sizes with the following details:
Economy poppers Regular poppers
Annual capacity 50,000 boxes 120,000 boxes
Costs:
Annual machine rental P 80,000 P 110,000
Popcorn cost per box 1.30 1.30
Cost of each box 0.80 0.80
Other variable costs per box 2.20 1.40
2. What level of output at which the Economy and Regular Poppers would earn the same profit (loss)?

Problem 3
Aladdin Company has 100 units of obsolete part. The variable cost to produce them was P 40 per unit. They could now
be sold for P 30 each and it would cost P 60 to make them now. The parts can be reworked for P 80 each and sold for P 170.
3. What is the monetary advantage of reworking the parts over the next-best action?

Problem 4
Desert Company produces three products from a joint process costing P 100,000. The following information is available:

Units SP (split off) Cost to process further SP (After Further)

A 10,000 35 60,000 40
B 20,000 40 20,000 45
C 30,000 20 90,000 25

4. Which products should be processed further?

Problem 5
The income statement of product Pabigat, one of the products being sold by Palugi Company is reproduced below:
Sales P 80,000
 Costs and expenses 92,000
Net loss (P 12,000)
P 37,600 of the costs and expenses above are fixed, of which P 21,600 is unavoidable regardless of whether the product
will be dropped or not.
5. What is the product elimination (shutdown) point?

Probem 6
Baghdad Company produces and sells 8,000 units of Product X each year. Each unit of Product X sells for P 10 and has
a contribution margin of P 6. It is estimated that if Product X is discontinued, P 50,000 of the P 60,000 in fixed costs charged to
Product X could be eliminated.
6. These data indicate that if Product X is discontinued, overall company operating income should ?

Probem 7
Lebanon plans to discontinue a division with a P 20,000 contribution margin. Overhead allocated to the division is
P50,000, of which P 5,000 cannot be eliminated.
7. What is the effect on Lebanon’s pretax income by this plan?

Problem 8
Abu Company sells Product B at a selling price of P 21 per unit. Abu’s cost per unit based on the full capacity of 200,000
units is as follows:
Direct materials P 4.00
Direct labor 5.00
Overhead (2/3 fixed) 6.00
P 15.00
A special order offering to buy 20,000 units was received from a foreign distributor. The only selling cost that would be
incurred for this order would be P 3 per unit for shipping. Abu has sufficient existing capacity to manufacture the additional units.
8. In negotiating the price for the special order, Abu should consider that the minimum selling price per unit should be:

Problem 9
Iraq, Inc. sells a product for P 30. Variable cost is P 16. Iraq could accept a special order for 1,000 units at P 23.
9. If Iraq accepted the order, how many units could it lose at the regular price before the decision became unwise?

Probem 10
Turkey Technology manufactures a particular computer component. Currently, the costs per unit are as follows:
Direct materials, P 50; direct labor, P 500; variable overhead, P 250; fixed overhead, P 400.
Pakistan Inc. has obtained Turkey with an offer to sell 10,000 units of the component for P 1,100 per unit. If Turkey
accepts the proposal, P 2,500,000 of the fixed overhead will be eliminated.

10. Should Turkey make or buy the component?

Problem 11
Saudi, Inc. is operating at 70% capacity and considers making Part A5 now being purchased from outside suppliers for
P 110 each, which is projected to increase in the near future. Saudi has the equipment and labor force required to
manufacture Part A5. The design engineer estimates that each part requires P 40 of direct materials and P 30 of direct
labor. The plant overhead is 200% of direct labor peso cost, and 40% of the overhead is fixed cost.

11. A decision to manufacture Part A5 will result in a gain or (loss) for each component of:

Probem 12
Yemen Company manufactures 20,000 units of a certain component per year. This component is used in the production
of a main product. The following are the costs to make the component per unit:
Direct materials P 11
Direct labor 14
Variable overhead 8
Fixed overhead 9
If Yemen buys the component from outside supplier the company can rent out the released facilities for P 20,000 a year.
The cost of the component per unit as quoted by the supplier is P 36. 60% of the fixed overhead applied in the manufacture of the
component will continue regardless of what decision is made. For all purchases made by the company, freight and handling costs
are applied at 1% of the purchase price. The direct materials cost is exclusive of the freight and handling cost.

12. What is the economic advantage or disadvantage of buying the component?

Probem 13
Iran Company needs 20,000 of a certain part to use in its production cycle. The following information is available:
Cost to Iran to make the part:
Direct materials P4
Direct labor 16
Variable overhead 18
Fixed overhead applied 10
P 48
Cost to buy the part from the Syria Company
P 36
If Iran buys the part from Syria Co., Iran could not use the released facilities in another manufacturing activity. 60% of
the fixed overhead applied will continue regardless of what decision is made.

13. In deciding whether to make or buy the part, what are the total relevant costs to make the part?

Probem 14

Cairo Manufacturing uses 10 units of Part Number KJ45 each month in the production of radar equipment. The unit cost
to manufacture one unit of KJ45 is presented below.
Direct materials P 1,000
Materials handling (20% of direct material cost) 200
Direct labor 8,000
Manufacturing overhead (150% of direct labor) 12,000
Materials handling represents the direct variable costs of the Receiving Department that are applied to direct materials
and purchased components on their cost. This is a separate charge in addition to manufacturing overhead. Cairo’s annual
manufacturing overhead budget is one-third variable and two-thirds fixed. Egypt Suppliers, one of Cairo’s reliable vendors, has
offered to supply Part KJ45 at a unit price of P 15,000. If Cairo purchases the KJ45 units from Scott, the capacity Cairo used to
manufacture these parts would be idle.
14. Should Cairo decide to purchase the parts from Egypt, the unit cost of KJ45 would:

Problem 15
Dimasalang Company has only 25,000 hours of machine time each month to manufacture its two products. Product X has
a contribution margin of P50 and Product Y has a contribution margin of P64. Product X requires 5 machine hours and Product
Y, 8 hours.
15. If Dimasalang wants to dedicate 80% of its machine time to the product that will provide the most income, it will have a total
contribution margin of?

Problem 16
Product A sells for P12 per unit and its variable cost per unit is P10. Product B sells for P15 per unit and its variable cost
per unit is P12. The plant capacity is 350,000 machine hours and Product A requires 48 minutes to complete while Product B
requires 75 minutes.

16. Which of the following will provide the best sales mix of Product A and Product B assuming the market limitation of Product
A is 200,000 units and the market limitation of Product B is 250,000 units?

Problem 17
HILO Company manufactures electric carpentry tools. The production department had met all production requirements
for the current month and has an opportunity to produce additional units of product with its excess capacity. Unit selling prices
and unit costs for three different drill models are as follows:
Home Model Deluxe Model Pro Model
Selling price P58 P65 P80
Direct material 16 20 19
Direct labor (P10 per 10 15 20
hour)
Variable overhead 8 12 16
Fixed overhead 16 5 15

Variable overhead is applied on the basis of direct-labor pesos, while fixed overhead is applied on the basis of machine
hours. There is sufficient demand for the additional production of any model in the product line.
17. If it has excess machine capacity but a limited amount of labor time, to which product or products should HILO Company
devote its excess production?

Problem 18
A business is operating at 90% of capacity and is currently purchasing a part which is being used in its manufacturing
operations for P15 per unit. The unit cost for the business to make the part is P20, including fixed costs, and P12, not including
fixed costs.
18. If 30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what
would be the amount of differential cost, increase or decrease, from making the part rather than purchasing it?
Problem 19
Sylvan Processing Company is considering whether to make 2,000 units of product Whirl which costs P16 a unit or buy
it from outside for P15 a unit. A further analysis shows that if product Whirl is outsourced, fixed costs of P8,000 attributable to
this product will be reduced by 25%.
19. If Sylvan Processing Company purchased the product Whirl, the space could be rented out for P6,000. If the product is
outsourced, profit would

Probem 20
It costs P450,000 to make 15,000 units of a part in this plant. This cost includes material of P90,000, direct labor of
P120,000, variable overhead of P15,000, and P225,000 in fixed overhead inclusive of P45,000 in depreciation and common
overhead allocation of P150,000. The balance is for the section supervisor's salary. The part can be purchased for P20 a unit. If the
part is purchased, the space released can be rented for P65,000.
20. If the part is purchased, the company will (lose) gain?

Problem 21
Chua Company sells a product for P20 with variable cost of P8 per unit. Chua could accept a special order for 1,000
units at P14
21. If Chua accepted the order, how many units could it lose at the regular price before the decision become unwise?

Problem 22
Wawa Enterprises has the capacity to produce 10,000 bearings, but operates at 90% of capacity. Bearings normally sell
for P60 each, and cost an average of P50 to make, including a share of the monthly fixed costs of P180,000. Ilog Corp has offered
to buy 1,000 bearings at P40 each.
22. What is the relevant cost per unit?

Problem 23
Dockham Company makes two products from a common input. Joint processing costs up to the split-off point total
$33,600 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point.
Each product may be sold at the split-off point or processed further. Data concerning these products appear below:
Product X Product Y Total
Allocated joint processing costs ................ $14,000 $19,600 $33,600
Sales value at split-off point ...................... $20,000 $28,000 $48,000
Costs of further processing ........................ $26,300 $24,500 $50,800
Sales value after further processing .......... $50,200 $48,600 $98,800

23. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point?
24. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point?
25. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

Problem 24
The Molis Company has the capacity to produce 15,000 haks each month. Current regular production and sales are
10,000 haks per month at a selling price of $15 each. Based on this level of activity, the following unit costs are incurred:
Direct materials ......................................... $5.00
Direct labor ................................................ $3.00
Variable manufacturing overhead ..........… $0.75
Fixed manufacturing overhead .................. $1.50
Variable selling expense ........................... $0.25
Fixed administrative expense .................... $1.00
The fixed costs, both manufacturing and administrative, are constant in total within the relevant range of 10,000 to
15,000 haks per month. The Molis Company has received a special order from a customer who wants to pay a reduced price of
$10 per hak. There would be no selling expense in connection with this special order. And, this order would have no effect on the
company's other sales.
26. Suppose the special order is for 4,000 haks this month. If this offer is accepted by Molis, the company's operating income for
the month will:
27. Suppose the special order is for 6,000 haks this month and thus some regular sales would have to be given up. If this offer is
accepted by Molis, the company's operating income for the month will:

Problem 25
Ahringer Company makes 50,000 units per year of a part it uses in the products it manufactures. The unit product cost of
this part is computed as follows:
Direct materials ......................................... $19.10
Direct labor ................................................ 21.70
Variable manufacturing overhead ............. 2.10
Fixed manufacturing overhead .................. 14.20
Unit product cost ....................................... $57.10
An outside supplier has offered to sell the company all of these parts it needs for $50.10 a unit. If the company accepts
this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The
additional contribution margin on this other product would be $135,000 per year. If the part were purchased from the outside
supplier, all of the direct labor cost of the part would be avoided. However, $9.30 of the fixed manufacturing overhead cost being
applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead
cost would be applied to the company's remaining products.
28. How much of the unit product cost of $57.10 is relevant in the decision of whether to make or buy the part?
29. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

Problem 26
Melbourne Company has traditionally made a subcomponent of its major product. Annual production of 30,000
subcomponents results in the following costs:
Direct materials ................. $250,000
Direct labor ........................ $200,000
Variable overhead ............. $190,000
Fixed overhead .................. $120,000
Melbourne has received an offer from an outside supplier who is willing to provide the 30,000 units of the subcomponent each
year at a price of $28 per unit. Melbourne knows that the facilities now being used to manufacture the subcomponent could be
rented to another company for $80,000 per year if the subcomponent were purchased from the outside supplier. Otherwise, there
would be no effect of this decision on the total fixed overhead of the company.
30. If Melbourne decides to purchase the subcomponent from the outside supplier, what would be the impact on the company's net
operating income for the year?
31. At what price per unit charged by the outside supplier would Melbourne be economically indifferent between making the
subcomponent or buying it from outside?

Problem 27
The Talbot Company makes wheels that it uses in the production of bicycles. Talbot's costs to produce 100,000 wheels
annually are:
Direct materials ............................. $30,000
Direct labor .................................... $50,000
Variable overhead ......................... $20,000
Fixed overhead .............................. $70,000
An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the wheels are purchased from the
outside supplier, $15,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another
company for $45,000 per year.
32. If Talbot chooses to buy the wheel from the outside supplier, then the change in annual net operating income due to accepting
the offer is a:
33. What is the highest price that Talbot could pay the outside supplier for the wheel and still be economically indifferent between
making or buying the wheels?

Problem 28
Key Company is considering the addition of a new product to its current product lines. The expected cost and revenue
data for the new product are as follows:
Annual sales .......................................................... 2,500 units
Selling price per unit .......................................... $304
Variable costs per unit: Production .......................................................... $125
Selling ................................................................ $49
Avoidable fixed costs per year:
Production .......................................................... $50,000
Selling ................................................................ $75,000
Allocated common corporate costs per year ...... $55,00
If the new product is added, the combined contribution margin of the other, existing product lines is expected to drop $65,000 per
year. Total common corporate costs would be unaffected by the decision of whether to add the new product.
34. If the new product line is added next year, the increase in net operating income resulting from this decision would be:
35. What is the lowest selling price per unit that could be charged for the new product line and still make it economically desirable
to add the new product line?

Problem 29
The Flint Fan Company is considering the addition of a new model fan, the F-27, to its current product lines. The
expected cost and revenue data for the F-27 fan are as follows:
Annual sales .............................................. 4,000 units
Unit selling price ....................................... $58
Unit variable costs:
Production .............................................. $34
Selling .................................................... $4
Avoidable fixed costs per year:
 Production .............................................. $20,000
Selling .................................................... $30,000
If the F-27 model is added as a new product line, it is expected that the contribution margin of other product lines at Flint
will drop by $7,000 per year.
36. If the F-27 product line is added next year, the change in operating income should be:
37. What is the lowest unit selling price that could be charged for the F-27 model and still make it economically desirable for Flint
to add the new product line?

Problem 30
Jordan Company budgeted sales of 400,000 calculators at $40 per unit last year. Variable manufacturing costs were
budgeted at $16 per unit, and fixed manufacturing costs at $10 per unit. A special order for 40,000 calculators at $23 each was
received by Jordan in March. Jordan has sufficient plant capacity to manufacture the additional quantity without incurring any
additional fixed manufacturing costs; however, the production would have to be done on an overtime basis at an estimated
additional cost of $3 per calculator. Acceptance of the special order would not affect Jordan's normal sales and no selling expenses
would be incurred.
38. What would be the effect on net operating income if the special order were accepted?

Problem 31
Teich Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company
uses 15,000 of the components each year. The unit product cost of the component according to the company's absorption cost
accounting system is given as follows:
Direct materials ......................................... $ 7.90
Direct labor ................................................ 2.10
Variable manufacturing overhead ............. 1.10
Fixed manufacturing overhead .................. 4.00
Unit product cost ....................................... $15.10
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 10% is avoidable if the component were
bought from the outside supplier; the remainder is not avoidable. In addition, making the component uses 3 minutes on the
machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on
another product that requires 6 minutes on the constraining machine and that has a contribution margin of $8.10 per unit.
39. When deciding whether to make or buy the component, what cost of making the component should be compared to the price
of buying the component?

Problem 31
The following information relates to next year's projected operating results of the Aluminum Division of Wroclaw
Corporation:
Contribution margin ...................... $1,500,000
Fixed expenses .............................. 1,700,000
Net operating loss .......................... $ (200,000)
If Aluminum Division is dropped, $1,000,000 of the above fixed costs would be eliminated.
40. What will be the effect on Wroclaw's profit next year if Aluminum Division is dropped instead of being kept?

Problem 32
 Kahn Company produces and sells 8,000 units of Product X each year. Each unit of Product X sells for $10 and has a
contribution margin of $6. It is estimated that if Product X is discontinued, $50,000 of the $60,000 in fixed costs charged to
Product X could be eliminated.
41. These data indicate that if Product X is discontinued, overall company net operating income should:

Problem 33
Yehle Inc. regularly uses material Y51B and currently has in stock 460 liters of the material for which it paid $2,530
several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $4.55 per liter. New stocks of
the material can be purchased on the open market for $5.45 per liter, but it must be purchased in lots of 1,000 liters. You have
been asked to determine the relevant cost of 720 liters of the material to be used in a job for a customer.
42. The relevant cost of the 720 liters of material Y51B is:

Probem 34
Narciso Corporation is preparing a bid for a special order that would require 880 liters of material R19S. The company
already has 280 liters of this raw material in stock that originally cost $6.20 per liter. Material R19S is used in the company's main
product and is replenished on a periodic basis. The resale value of the existing stock of the material is $5.45 per liter. New stocks
of the material can be readily purchased for $6.20 per liter.
43. What is the relevant cost of the 880 liters of the raw material when deciding how much to bid on the special order?

Problem 35
Wenig Inc. has some material that originally cost $73,500. The material has a scrap value of $45,600 as is, but if
reworked at a cost of $6,600, it could be sold for $58,100.
44. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling
it as is as scrap?

Problem 36
The Carter Company makes products A and B in a joint process from a single input, R. During a typical production run,
50,000 units of R yield 20,000 units of A and 30,000 units of B at the split-off point. Joint production costs total $90,000 per
production run. The unit selling price for A is $4 and for B is $3.80 at the split-off point. However, B can be processed further at a
total cost of $60,000 and then sold for $7.00 per unit.
45. In a decision between selling B at the split-off point or processing B further, which is not relevant?
46. If product B is processed beyond the split-off point, the change in operating income from a production run (as compared to
selling B at the split-off point) would be:

Problem 37
Paulsen Company makes two products, W and P, in a joint process. At the split-off point, 50,000 units of W and 60,000
units of P are available each month. Monthly joint production costs are $290,000. Product W can be sold at the split-off point for
$5.60 per unit. Product P either can be sold at the split-off point for $4.75 per unit or it can be further processed and sold for $7.20
per unit. If P is processed further, additional processing costs of $3.10 per unit will be incurred.
47. If P is processed further and then sold, rather than being sold at the split-off point, the change in monthly net operating income
would be a:
48. What would the selling price per unit of Product P need to be after processing in order for Paulsen Company to be
economically indifferent between selling P at the split-off point or processing P further?
Problem 38
Fothergill Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of
this part is computed as follows:
Direct materials ......................................... $23.40
Direct labor ................................................ 22.30
Variable manufacturing overhead ............. 1.40
Fixed manufacturing overhead .................. 24.60
Unit product cost ....................................... $71.70
An outside supplier has offered to sell the company all of these parts it needs for $59.20 a unit. If the company accepts
this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The
additional contribution margin on this other product would be $352,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However,
$21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the
outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.
49. How much of the unit product cost of $71.70 is relevant in the decision of whether to make or buy the part?
50. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?